All Forum Posts by: Will Barnard

Some good info here but not all correct.
UBTI will occur on any debt financed investment held in any SD IRA as tax-deferred/tax free $ can not/should not compete with other taxable structures as stated by the IRS. This is where UBTI comes from.
For instance, the IRS says that it is not fair that a business (say a coffe house) which is held in a SDI open up and compete with a taxable entity such as Starbucks. The Coffe house held in a SDI would have the luxary of selling their products at a lower price because it would not have tax implications as does the Starbucks, therefore, the IRS created what is known as UBTI.

Now, speaking from a RE investing standpoint, UBTI is not necesarrily a bad thing. Take this into consideration:
Purchase a home for $100,000 with 30,000 from the SDI and debt finance the balance $70,000. Sell the property in 5 yeras for $200,000.
Calcualte the Loan to Sale Ratio which would be $70,000 divided by $200,000 which equals 35%. The sale price of $200k less the purchase price of $100k is $100k profit which is now multiplied by the 35% which equals $35,000. The UBTI tax rate would be 30% times the $35,000 figure which is equal to $10,500 (which is your UBTI tax due).
Now, $10,500 tax on $100,000 profit is only 10.5% which is even lower than estate tax of 15%.

This example illustrates why UBTI is NOT necessarily a bad thing. Condier how much you would have made in profit without utilizing debt financing.
I believe you would end up with a larger net each time because you could invest more utilizing debt financing. It is a great and wonderful strategy used by many wealthy individauls who will gladly pay only 10-12% in tax rather tha the larger alternatives. Do not forget that in your ROTH IRA (with the above example) you net $89,500 after paying the UBTI which goes back into the IRA TAX FREE.

Hope this clarifies how UBTI works in the real world.
Best of luck to you.

Marshall, self-directed IRA's are rapidly growing as more and more Americans are becoming aware of them. As Mike mentioned, Equity Trust Company www.trustetc.com is a great SDI administartor which I personally use. I am a RE investor and I borrow funds from investor's SDI funds and pay them nice interest rate returns ranging from 8%-15%.
If you do not want to actually hold properties then loaning $ guaranteed by the RE is a great strategy.

Wheatie mentioned that the administrator approves the investment and that is not true. You control the funds and the direction of investment, not the administrator. The admin. simple documents and reports all activity to the IRS and assists you to be in compliance with all rules and regulations. They never have control of the assets. As for the checkbook control, that is only necessary for advanced investors who utilize strategies which require funds immediately such as tax lien certificates, all cash 3-5 day closes, etc.

I highly recommend using Equity Trust, roll your 401k into a SDI and start buying property or loaning $ secured by the real estate. If you need further assistance in addition to what ETC gives you, feel free to contact me and I will help you any way possible.

Best of luck to you and I believe you are on the right path.

Speak to an attorney. Land trusts are only recognized in 4 states FL being one of them. As for protecting yourself from lawsuites, etc. get an insurance umbrella policy. You can get 1-2 million for very cheap. Much less than what the gurus charge for the trust prep docs and maintenance.

Also, trusts may have an effect on your taxes, speak to the tax attorney/cpa on this.
If you have only one or two properties and there is little equity in total, there is not much risk there so long as you do not act negligent in the management of your properties.

Good luck.

Josh,

The links to the blogs are great which explain the definition, calculation method, and reasoning for their use, however, they are general in nature.
Wendy did not provide figures in order to properly calculate this particular investment and I am quite worried about her even thinking of investing in such a large building if she has no idea about cap rates. That could be a financially fatal mistake.

In addition, the 50% rule that I keep seeing on this forum is for a quick scan evaluation of properties and not to be used to calculate true cap rates, dscr, operating expenses, NOI, ROI, or any other pertinent figures, particularly with a complex this size.

Wendy, my advice is to get some professional help evaluating this investment such as a very experienced investor, CPA, and/or RE attorney. There are many determining factors you need to calculate in order to arrive at the asking price's true cap rate and what cap rate it is currently worth.

Wendy, send the exact figures to me including taxes, insurance, management, utilities, administration/professioanl fees, makeready expense, trash, landscaping, and all other operating expenses and I will calculate the value for you as well as the asking cap rate, dscr, and price at which I would offer.

Hope this was helpful

Difficult, not unrealistic.
I have a duplex with $400 cash flow and 90% financed in Texas.
It is new so I will not have to worry about major maintenance/repair expenses for the first few years.

Your 50% OE (assumed). What is that based on?
The average OE for commercial multifamily units ranges between 40%-60%. A fourplex is not commercial and does not have the added expenses of an apartment complex.
Your operating expenses should be:
Taxes, Insurance, Property management, & repairs/maintenance
(Take into consideration the age of this unit, the older the higher the maintenance % should be)
The expenses should be calculated on the exact figures, not guess work or a proforma.
On a duplex-4plex, these expenses should not exceed 40%. If they do, I would look elswhere or figure a way to reduce the expenses.

Here is how I see the deal:
$2150 Gross Income
$2042 Adjusted GI (Less 5% for vacancy, adjust this % according to the area average)
$816 Operating Expenses (taxes, Ins, Prop Man., Repairs)
$1226 NOI
$838 Debt Service ($126,000 @ 7% PI)
$ 95 Mortgage Insurance (Loans in excess of 80% LTV)
$293 Monthly Cash Flow ($73 per door, which is below the $100 u want)
$ 95 Monthly tax deduction (assumes 28% tax bracket)
$ 81 Principle Reduction
Total Cash investment = $14000 + $4500 Escrow/Impounds = $19500
Total Return on Investment = 23% (Net Cash Flow + Prin. Red.)

I shoot for at least 25% TROI and $100 per door so I would do some negotiating before buying this deal.

Just to quote a few of my favorite lines on this subject:
The rich act in spite of fear while others allow fear to stop them.
Rich people do what others think about doing.
Adopt wealthy ways of thinking.
AND MY FAVORITE:
The greatest mistake in life you can make is to continuously be afraid you will make one!

That all said, everyone, including myself, is scared the first time. The only way to overcome the fear is to Just do it! Get eductaed first, do not buy RE blindly which WILL be a mistake. You can also get someone on your "team" who is veru experienced to assist you in this business. That is how I got started.

In today's market, I suggest the buy and hold strategy and acquire as much as you can without over-extending and always do your due diligence.

Good luck to all and happy investing!

Many of these posts suggested leaving the wife, hiding it from her, lying, or telling her to basically shut the f up. First of all, none of you are Tony Soprano, and secondly this business requires morals, ethics and integrity. The last thing we need in this business is to add more crap such as the unethical guru salespeople who prey on newbie investors.
If you can not communicate with your wife, perhaps the problem is with you. I suggest getting educated first before buying anything. Once educated (and during the process) you can coach your wife and intrigue her interest. Locate quotes, stories, and columns by the nations wealthiest individuals like Trump and Buffet. They are always encouraging RE as a viable investment and wealth building vehicle. There are also statistics that show that of the nation's wealthy, over 35% of their holdings are in RE.

In order to suceed in this business, you must be educated and must build a great team which includes your significant other.

Enough said.

I too put investments together for investors who live in areas where cash flow is nearly impossible, like in NY and CA. To get started, you simply need to look to other areas or even other states. Buying out of state is not as scary as it seems so long as you have the right team. Property management, insurance brokers, lenders, builders, etc are all necessary for your team. For less maintenance headaches (when considering out of state investments) look for newer properties or better yet, new construction as they come with one-two year builder warranties.
There are many great deals to be had in many states as real estate is on sale. Do not miss this wonderful opportunity to buy low, hold, and sell high years later. You will not regret it!

Best of luck to all!

Having a mortgage and property in your personal name and then quit claiming into an entity in which you are the owner, managing partner, etc. does not violate the due on sale clause. Any lender will see that the property did not change ownership, but simply the structure of ownership.
Consult with a competant RE attorney who will confirm exactly what I am saying. I do this all the time as do thousands of other investors.

The real question is, why do you want/need an entity? For liability protection - do not be negligent and you should be fine. Also as suggested from another response, get a large insurance umbrella policy. This is much more cost effective than paying for state franchise fees, the set up costs and the accounting of an LLC.

Let me make one final point here. I am not discouraging the structuring of entities to hold RE, simply pointing out options and the need to consult with a tax pro about each person's individual situation and future planning.

I have both LLC's and an S Corp, but I operate as a full time investor and have many different types of investments and necessary tax startegies for my situation.